UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended June 30, 2000.
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Transition Period From __________________ to __________________
Commission file number 0-21504
QUAD SYSTEMS CORPORATION
------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 23-2180139
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2405 MARYLAND ROAD, WILLOW GROVE, PA 19090
----------------------------------------------------
(Address of principal executive offices)
(215) 657-6202
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
At August 4, 2000, 4,505,397 of the registrant's Common Stock $.03 par value
were outstanding.
<PAGE>
INDEX
PART I. FINANCIAL INFORMATION PAGE NUMBER
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets at June 30, 2000 (Unaudited) and
September 30, 1999 .............................................. 3
Condensed Consolidated Statements of Operations (Unaudited)
for the three and nine months ended June 30, 2000 and 1999....... 4
Condensed Consolidated Statements of Cash Flows (Unaudited)
for the nine months ended June 30, 2000 and 1999 ................ 5
Notes to Condensed Consolidated Financial Statements (Unaudited)...... 6
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations....................................... 8
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk........ 14
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K................................ 15
Signature................................................................ 16
2
<PAGE>
QUAD SYSTEMS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share and Per Share Amounts)
ASSETS
<TABLE>
<CAPTION>
June 30, September 30,
2000 1999
--------- ------------
(Unaudited)
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 1,041 $ 2,890
Accounts receivable, net 9,561 9,695
Inventory 18,970 16,446
Other 2,107 2,252
--------- ---------
Total current assets 31,679 31,283
Property and equipment, at cost
less accumulated depreciation of $4,558
at June 30, 2000 and $3,801 at September 30, 1999 2,230 2,497
--------- ---------
$ 33,909 $ 33,780
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit $ 3,697 $ 1,318
Accounts payable 8,710 3,887
Accrued expenses 4,738 5,790
Deferred service revenue 1,447 986
Customer deposits 841 271
Current portion of long-term debt 637 636
--------- ---------
Total current liabilities 20,070 12,888
Long-term debt, less current portion 253 1,126
--------- ---------
Total liabilities 20,323 14,014
Stockholders' equity:
Preferred Stock, par value $.01 per share;
authorized shares: 1,000,000; no shares issued
at June 30, 2000 and September 30, 1999 - -
Common Stock, par value $.03 per share;
authorized shares: 15,000,000;
shares issued: 4,505,397 at June 30, 2000
and 4,444,072 at September 30, 1999 135 133
Additional paid-in-capital 24,727 24,657
Accumulated Deficit (10,748) (4,906)
Accumulated other comprehensive loss (528) (118)
--------- ---------
Total stockholders' equity 13,586 19,766
--------- ---------
$ 33,909 $ 33,780
========= =========
</TABLE>
See accompanying notes.
3
<PAGE>
QUAD SYSTEMS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Share and Per Share Amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
-------------------------------- --------------------------------
June 30, June 30,
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $ 15,026 $ 10,283 $ 36,774 $ 33,413
Cost of products sold 10,689 8,203 25,772 25,720
----------- ----------- ----------- -----------
Gross profit 4,337 2,080 11,002 7,693
Operating expenses:
Engineering, research and development 1,336 1,247 4,069 3,682
Selling and marketing 3,002 2,118 8,770 6,999
Administrative and general 1,436 1,195 3,869 3,438
----------- ----------- ----------- -----------
5,774 4,560 16,708 14,119
----------- ----------- ----------- -----------
Loss from operations (1,437) (2,480) (5,706) (6,426)
Gain on sale of SMTech, Ltd. - - 8,375
Interest (expense) income, net (93) 47 (136) 98
----------- ----------- ----------- -----------
Income (loss) before income taxes (1,530) (2,433) (5,842) 2,047
Income tax expense - - - 6,638
----------- ----------- ----------- -----------
Net loss $ (1,530) $ (2,433) $ (5,842) $ (4,591)
=========== =========== =========== ===========
Net loss per share:
Basic and Diluted $ (0.34) $ (0.55) $ (1.31) $ (1.04)
Weighted average number of shares outstanding:
Basic and Diluted 4,483,563 4,423,975 4,467,508 4,417,108
</TABLE>
See accompanying notes.
4
<PAGE>
QUAD SYSTEMS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
---------------------------
June 30,
2000 1999
---------- ----------
Operating Activities
<S> <C> <C>
Net loss $ (5,842) $ (4,591)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Depreciation and amortization 757 1,181
Provision for (recovery from) for losses on accounts receivable (23) (130)
Provision for deferred income taxes - 4,539
Gain on sale of SMTech, Ltd. - (5,127)
Changes in operating assets and liabilities, net:
Accounts receivable 157 4,131
Inventory (2,524) 946
Other assets (265) 778
Accounts payable 4,823 (893)
Accrued expenses (1,052) (1,952)
Customer deposits 570 (311)
Deferred service revenue 461 13
Income taxes payable - (946)
---------- ----------
Net cash used in operating activities (2,938) (2,362)
Investing Activities
Proceeds from the sale of SMTech, Ltd. - 14,050
Proceeds from the sale of equipment - 122
Purchases of property and equipment (490) (739)
---------- ----------
Net cash (used in) provided by investing activities (490) 13,433
Financing Activities
Proceeds from (repayments of) line of credit 2,379 (7,170)
Common Stock issued under employee benefit plans 72 112
Principal payments on long-term debt (872) (475)
---------- ----------
Net cash provided by (used in) financing activities 1,579 (7,533)
---------- ----------
Net (decrease) increase in cash and cash equivalents (1,849) 3,538
Cash and cash equivalents at beginning of period 2,890 2,116
---------- ----------
Cash and cash equivalents at end of period $ 1,041 $ 5,654
========== =========
</TABLE>
See accompanying notes.
5
<PAGE>
QUAD SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1 Basis of Presentation
The accompanying financial statements present the consolidated financial
position, results of operations and cash flows of Quad Systems Corporation and
its wholly-owned subsidiaries (the "Company") as of the dates and for the
periods indicated. All material intercompany accounts and transactions have been
eliminated in consolidation.
For ease of presentation, the Company has indicated its quarterly financial
reporting periods as ending on the last day of December, March, June and
September; whereas, in fact, the Company reports on a 52-53 week fiscal year
ending on the last Sunday in September, with quarterly period ends that may be
different than the above indicated reporting dates.
The accompanying unaudited condensed consolidated financial statements for the
three and nine months ended June 30, 2000 and 1999 have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the three and nine month periods ended June 30,
2000 are not necessarily indicative of the results that may be expected for the
year ending September 30, 2000.
This quarterly report should be read in conjunction with the Company's Annual
Report on Form 10-K containing Management's Discussion and Analysis of Financial
Condition and Results of Operations along with the financial statements for the
fiscal year ended September 30, 1999, together with notes thereto.
Note 2 Inventory
The components of inventory consist of the following (in thousands):
June 30, September 30,
2000 1999
----------- ----------
Raw materials $ 5,820 $ 6,597
Work in process 1,992 1,926
Finished products 11,158 7,923
------- -------
$18,970 $16,446
======= =======
Note 3 Comprehensive Income (Loss)
SFAS No. 130 establishes standards for reporting and display of comprehensive
income (loss) and its components. SFAS No. 130 requires foreign currency
translation adjustments to be included in other comprehensive income (loss). The
components of comprehensive income (loss) consist of the following (in
thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
---------------------- ---------------------
June 30, June 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net loss $(1,530) $(2,433) $(5,842) $(4,591)
Foreign currency translation adjustment (75) (206) (410) (219)
------- ------- ------- -------
Comprehensive loss $(1,605) $(2,639) $(6,252) $(4,810)
======= ======= ======= =======
</TABLE>
6
<PAGE>
QUAD SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED) (UNAUDITED)
Note 4 Net Loss Per Share
The following table sets forth the computation of basic and diluted net loss per
share:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
---------------------- ---------------------
June 30, June 30,
2000 1999 2000 1999
---- ---- ---- ----
Numerator:
<S> <C> <C> <C> <C>
Net loss $(1,530) $(2,433) $(5,842) $(4,591)
======= ======= ======= =======
Denominator:
Denominator for basic loss
per share-weighted average shares 4,483,563 4,423,975 4,467,508 4,417,108
--------- --------- --------- ---------
Basic and diluted earnings loss per share $ (0.34) $ (0.55) $ (1.31) $ (1.04)
======= ======= ======= =======
</TABLE>
The effect of dilutive securities for the periods indicated above were not
included in the computation of diluted loss per share because they were
antidilutive.
Note 5 Supplemental Disclosures to Statements of Cash Flows
The following are supplemental disclosures to the statements of cash flows (in
thousands):
June 30,
------------------
2000 1999
---- ----
Cash paid during the period for:
Interest $253 $207
===== =======
Income taxes received $(231) $(1,038)
===== =======
7
<PAGE>
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Results of Operations
For ease of presentation, the Company has indicated its quarterly financial
reporting periods as ending on the last day of December, March, June and
September; whereas, in fact, the Company reports on a 52-53 week fiscal year
ending on the last Sunday in September, with quarterly period ends that may be
different than the above-indicated reporting dates. The following table sets
forth certain financial data as a percentage of net sales for the periods
indicated:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ -----------------
June 30, June 30,
2000 1999 2000 1999
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Gross margin 28.9 20.2 29.9 23.0
Engineering, research and
development 8.9 12.1 11.1 11.0
Selling and marketing 20.0 20.6 23.8 20.9
Administrative and general 9.6 11.6 10.5 10.3
Loss from operations (9.6) (24.1) (15.5) (19.2)
Gain on sale of SMTech, Ltd. -- -- -- 25.1
Income (loss) before income (10.2) (23.7) (15.9) 6.1
taxes
Net loss (10.2) (23.7) (15.9) (13.7)
</TABLE>
Net sales of $15,026,000 and $36,774,000 for the three and nine months ended
June 30, 2000 increased $4,743,000 and $3,361,000, or 46.1% and 10.1%, compared
to the third quarter and first nine months of fiscal 1999, respectively. The
following table sets forth certain product line sales for the periods indicated
(in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ -----------------
June 30, June 30,
2000 1999 2000 1999
------ ------ ------- -------
<S> <C> <C> <C> <C>
Assemblers $8,383 $5,092 $18,966 $18,136
Screen printers 968 940 2,416 3,589
Reflow ovens 341 420 1,235 2,056
</TABLE>
Sales of assemblers in the third quarter of fiscal 2000 increased to $8.4
million from $6.0 million in the second quarter of fiscal 2000 and from $5.1
million in the third quarter of fiscal 1999. This increase in assembler sales
was due to successes in the introduction and ramp in sales of the Meridian
Series of products. Meridian products service customers in the medium to high
volume SMT environments, where low cost throughtput (i.e. cost per placement
sensitivity) is a primary concern. The Company's QSA-30 assembler, which had
addressed a small portion of this cost per placement sensitive sector, was
discontinued in 1999. To meet this sector's requirements and to address
competitive product offerings, the Company entered into a distribution agreement
with Mirae Corporation that resulted in the Meridian Series of products. The
Company began recording bookings, backlog and sales on selected Meridian
products in the second quarter of fiscal 2000 and currently is revenue
recognizing sales, bookings and backlog on six Meridian products. European sales
for the third fiscal quarter of 2000 were significantly higher due to the
completion and introduction of CE compliant Meridian products. CE certification
is a European market requirement for products to achieve certain electrical,
emissions and safety compliance levels. European customers equipment purchase
criteria is geared more toward price/performance and until the Meridian products
became CE compliant in late March 2000, the Company had no products to compete
in this category of equipment. The Company anticipates bookings and revenue
recognition on the remaining Meridian product during the first quarter of
fiscal 2001; however,
8
<PAGE>
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)
there can be no assurance that the Company's revenue recognition policies will
be met with respect to this remaining Meridian product.
The sale of SMTech Limited ("SMTech") at the beginning of fiscal year 1999 has
had a significant adverse impact on sales of screen printers, as the Company no
longer manufactured or sold screen printers through this former subsidiary,
although the Company realized a substantial gain on the sale. Sales of screen
printers were also adversely affected as discussed below in the Distribution
Agreements section.
International sales represented approximately 34.1% and 55.2% of net sales for
the third quarter of fiscal 2000 and 1999, respectively, and 30.6% and 45.0% of
net sales for the first nine months of fiscal 2000 and 1999, respectively. The
Company currently derives international sales from one wholly-owned UK
subsidiary that both manufactures and sells product, and from its US operation.
The Company also derives a small level of sales from certain non-UK wholly-owned
foreign subsidiaries. Sales into Europe decreased significantly due to the sale
of SMTech and the other factors previously discussed.
Gross margin for the third quarter of fiscal 2000 increased to 28.9% from 20.2%
and to 29.9% from 23.0% compared to the three and nine months periods ended June
30, 2000 to June 30, 1999. In fiscal 1999, gross margins were affected by
inventory provisions for product obsolescence. Excluding these inventory
provisions, gross margins for the third quarter and first nine months of fiscal
1999 were 23.6% and 25.3%, respectively. The Company believes ongoing efforts to
improve product quality, as discussed in previous public filings, has led to
improved margins. The Company also believes, however, that its gross margins for
the fourth fiscal quarter of fiscal 2000 may be lower than the third fiscal
quarter because of continued introductory marketing of Meridian products and a
continuing shift in product mix toward Meridian assembler sales.
Engineering, research and development expenses increased $89,000 or 7.1% and
$387,000 or 10.5% for the third quarter and first nine months of fiscal 2000,
respectively, compared to the same periods of the prior year. These increases
were the result of increased personnel, which affected salaries and fringe
benefits, as well as research and development expenses related to key product
development and enhancements.
Selling and marketing expenses increased $884,000 or 41.8% and $1,771,000 or
25.3% for the third quarter and first nine months of fiscal 2000, respectively,
compared to the same periods last year, primarily as a result of an increase in
sales, related commissions and service personnel in support of increased sales.
The Company expects that selling and marketing expenses could increase in the
fourth quarter of fiscal 2000 if anticipated sales increases are achieved.
However, the Company also believes operating expenses, as a percentage of sales,
could decrease as a result of these anticipated higher sales levels. There can
be no assurance, however, that such increased sales levels in fact will occur.
9
<PAGE>
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Administrative and general expenses increased $241,000 or 20.2% and $431,000 or
12.5% for the third quarter and first nine months of fiscal 2000, compared to
the same periods last year. The increase primarily relates to a reduced recovery
in the provision for bad debts, which is attributable to an increase in the
accounts receivable balance at the end of the third quarter of fiscal 2000
compared to the third quarter of fiscal 1999, due to higher sales. The Company
believes that administrative and general expenses for the fourth fiscal quarter
could increase as a result of anticipated sales increases and arbitration
expenses related to the Company's continuing dispute with Samsung.
The Company did not record an income tax benefit in the three and nine month
periods ended June 30, 2000, since the deferred tax asset from the current
period's net operating loss was fully offset by a valuation allowance, as the
Company believes that the realization of the deferred tax asset is uncertain.
The Company does not expect to incur any tax expense or benefit for the
remainder of the fiscal year.
Backlog
As of June 30, 2000, the Company's backlog of orders was $8.2 million, compared
to $7.2 million as of March 31, 2000 and $5.5 million as of June 30, 1999.
Bookings for the third quarter of fiscal 2000 were $16.0 million, as compared to
bookings of $9.7 million in the third quarter of fiscal 1999. The following
table sets forth certain backlog information by product line for the periods
indicated (in thousands):
June 30,
2000 1999
------ ------
Assemblers $5,153 $3,002
Screen printers 187 351
Reflow ovens 165 61
The sale of SMTech at the beginning of fiscal 1999 has had a significant impact
on bookings and backlog of screen printers. The remainder of backlog, not
delineated above, consists of other products such as assembler options, spare
parts and QuadCare, a service and support program covering all of the Company's
products. It has been the Company's experience that purchasers of capital
equipment have not issued purchase orders calling for delivery of products over
an extended period. Backlog therefore may not necessarily be indicative of
future sales.
Liquidity and Capital Resources
The Company's working capital as of June 30, 2000 was $11.6 million, including
cash balances of approximately $1.0 million. At September 30, 1999, the Company
had working capital of $18.4 million, including cash balances of $2.9 million.
During the first nine months of fiscal 2000, net cash used in operations
amounted to $2.9 million. The cash used in operations was partially financed by
the Company's current asset-based line of credit with Congress Financial
Corporation, further described below. As of June 30, 2000, the outstanding line
of credit balance was approximately $3.7 million.
10
<PAGE>
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Effective July 1, 2000, the Company signed an amendment to its Loan and Security
Agreement ("Agreement") with Congress Financial Corporation. This amendment
includes an adjustment to the financial covenant under the original Agreement
signed on January 7, 2000. The amended Agreement permits borrowings up to a
maximum of $11.5 million, based on a percentage of eligible accounts receivable
and inventory. Interest costs are payable at either 0.75% above the bank's
published prime rate or under selected circumstances LIBOR plus 3.25%. The
interest rate will be reduced 0.5% if the Company remains in compliance with the
Agreement as amended through March 31, 2001. The Company is in compliance with
the Agreement.
The Company believes that its existing cash balances, cash flow from operations
and its borrowing capacity from the Agreement should be sufficient for the
Company to meet its working capital needs for the remainder of the fiscal year.
Additionally, based on certain management assumptions and its current sales and
marketing plan, the Company should continue to have adequate working capital to
meet its working capital needs for the next twelve months. Failure to meet such
sales and marketing plans would have a material adverse effect on the Company's
working capital needs.
Pending Accounting Changes
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101, ("SAB 101"), which provides guidance on the recognition,
presentation and disclosure of revenue in financial statements. SAB 101 requires
companies to meet certain customer acceptance provisions prior to revenue being
recognized. SAB 101 is effective no later than the first fiscal quarter of the
fiscal year beginning after December 15, 1999, which for the Company ends
December 31, 2000 fiscal quarter. The Company intends to adopt the bulletin and
is in the process of evaluating its impact, if any, on the financial statements.
Distribution Agreements
Under a long-term supply agreement with the Company executed in June 1996 (the
"Feeder Supply Agreement"), Samsung Techwin Corporation, Ltd. (formerly known as
Samsung Aerospace Industries Ltd.) ("Samsung") is the Company's sole supplier of
electronic component tape feeders, which are used in conjunction with the
Company's SMT assembler products and are sold on a stand-alone basis. The Feeder
Supply Agreement carries a six-year term with minimum purchase requirements and
provides for revised product pricing every two years during the term of the
Feeder Supply Agreement. Deliveries under the agreement commenced in fiscal year
1997, with the first two years of the six year supply period ending in June
2000. The Company's electronic tape feeders are available in 8mm, 12mm, 16mm,
24mm, 32mm, 44mm and other special formats and are compatible with all Quad
assembly systems, although certain of the Meridian Series of products work at
their optimal performance level in conjunction with a modified tape feeder
product currently manufactured and supplied by Samsung. In addition, the Company
offers docking feeder carts that can be loaded with tape feeders off-line and
rapidly rolled into place to prepare the assembler to populate a new Printed
Wiring Board ("PWB"). This feature can greatly reduce the time involved in
changing over the assembler from assembling one PWB to another.
11
<PAGE>
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
During the spring of 1999, the Company notified Samsung of Samsung's
non-compliance with certain quantity and quality requirements in its supply of
tape feeders under the Feeder Supply Agreement. As required under the terms of
the Feeder Supply Agreement, the Company supplied Samsung in late summer 1999
with its good faith requirements of the tape feeders for years three and four of
the six year supply term. In late November 1999, Samsung notified the Company of
Samsung's disagreement with the Company's position regarding its good faith
purchase requirements and threatened to terminate the Feeder Supply Agreement
and declare the Company in breach. On April 20, 2000 the Company received a
letter from Samsung advising the Company that it was in breach of the Feeder
Supply Agreement and notifying the Company that Samsung would terminate the
Feeder Supply Agreement if the Company did not provide a forecast of its
requirements for tape feeders for the fourth year within 30 days. Although the
Company believes that it has fully complied with the requirements of the Feeder
Supply Agreement, the Company provided the requested forecast within the
thirty-day period. The Company and Samsung have reached an agreement in
principal that the remainder of the six year period would not include minimum
purchase requirements, although no definitive amendment to the Feeder Supply
Agreement has been executed and such change may not be ultimately made. The
Company and Samsung have been attempting to resolve the disputes described above
and are negotiating the terms under which Samsung will continue to supply tape
feeders to the Company. The Company disputes Samsung's claims of non-compliance
with the Feeder Supply Agreement and believes it has adequate defenses to such
claims.
A disruption of the supply of component tape feeders, whether through a
termination of the Feeder Supply Agreement or otherwise, could adversely affect
the ability of the Company to meet its customers' needs and therefore, could
adversely affect the Company's revenues and earnings. If Samsung were to stop
supplying the Company with component tape feeders, the Company has the right
under the Feeder Supply Agreement to resume manufacturing feeders itself or use
alternative suppliers. The Company believes it has sufficient access to
alternative sources of component tape feeders to meet its needs should any
disruption in supply from Samsung occur, although there can be no assurance that
such alternate sources will be available or will be sufficient to meet the
Company's requirements.
In April 2000, Samsung delivered a Request for Arbitration and Statement of
Claim (the "Request for Arbitration") to the Company with respect to a dispute
regarding a proposed September 1997 joint development with Samsung of a high
speed, high volume SMT assembler, designated as the QSA-60 (the "Development
Agreement"). The Request for Arbitration arises out of the parties' previously
disclosed disagreements with respect to several issues relating to the
Development Agreement, including the parties' respective obligations relating to
development funding of the QSA-60 and any future distribution of the developed
product. In June 2000 the Company answered the Request for Arbitration and made
counterclaims against Samsung for substantial damages arising out of Samsung's
breach of the Development Agreement. Each of the parties had previously asserted
that the other had breached its obligations under the Development Agreement and,
in late November 1999 and in early January 2000, Samsung had made claims of
substantial damages and had threatened litigation with respect thereto, as
disclosed in the Company's report on Form 10-K for its 1999 fiscal year.
The Company believes it has meritorious defenses and counterclaims and intends
to vigorously defend itself during the arbitration; therefore, no provision for
this matter has been recorded to date, although no assurance of an outcome
favorable to the Company, either on its defenses, or its counterclaims, can be
made. The Request for Arbitration does not involve any current or previously
distributed Company products. The Company currently maintains other business
arrangements with Samsung that are not affected by this action.
12
<PAGE>
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
In conjunction with the sale of substantially all of the assets and business of
its U.K. subsidiary, SMTech, to Speedline Technologies, Inc. ("Speedline") in
October 1998, the Company entered into a supply agreement dated September 30,
1998 with Speedline for the purchase and resale of the former SMTech line of
screen printers (the "Printer Supply Agreement"). The terms of the Printer
Supply Agreement include minimum purchase requirements for one specific printer,
the AVX 500, and fixed pricing for all products, subject to periodic
renegotiations by the parties.
Within the first six months after commencement of the Printer Supply Agreement,
Speedline adjusted its selling prices on the Speedline equivalent of the AVX 500
to its customers to levels approximately equal to the fixed pricing to be paid
for the AVX 500 by the Company under the Printer Supply Agreement. This action
forced the Company to lower its selling prices of the AVX 500 to levels that
resulted in marginal income and occasional losses to the Company in order to
compete with Speedline. As a result, during the first supply term ending
November 1999, the Company purchased only 17 units of the minimum purchase
requirement of 40 units.
Approximately 7% of the Company's net sales in the first nine months of fiscal
year 2000 and 10% of the Company's fiscal year 1999 net sales were attributable
to sales of screen printers. Consequently, a disruption of the supply of screen
printers from Speedline could adversely affect the ability of the Company to
meet its customers' needs and could adversely affect the sale of the Company's
other products. The Company has been negotiating a resolution of the dispute
with Speedline and believes that an agreement satisfactory to the Company can be
reached, although there can be no assurance of such resolution. If Speedline
were to stop supplying the Company with screen printers, the Company has the
right to use alternative suppliers. The Company believes that there are other
suitable screen printer products that can be obtained from other screen printer
manufacturers.
Market and Other Risks
The Company's primary development and manufacturing activities are located in
the United States. Sales of its products into international markets make the
Company vulnerable to such factors as foreign currency exchange rates or weak
economic conditions in such markets. Quad's operating results are exposed to
changes in exchange rates especially between the U.S. Dollar and the U.K. Pound
Sterling, the Euro and to a lesser extent, other currencies in Western Europe,
South America and Asia-Pacific. To a certain extent, foreign currency exchange
rate movements affect the Company's competitive position, as exchange rate
changes may influence business practices and/or pricing strategies of non-U.S.
based competitors. In addition, transactions between the U.S. parent company and
its international subsidiaries, which are generally denominated in U.S. dollars,
are subject to gains or losses in the consolidated financial statements. The
Company does not typically hedge these transactions but attempts to limit
exposure to these situations by timely settlement of the U.S. dollar liabilities
in the subsidiary locations.
13
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ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Forward-Looking Statements
The discussions above regarding the Company's expectations of future sales and
bookings, gross margins, operating expenses, success of a distribution
arrangement with Mirae for the Meridian Series of products, the outcome of the
Arbitration, Year 2000 compliance and sufficiency of working capital needs
include certain forward-looking statements on these subjects. As such, actual
results may vary materially from such expectations. Among the more meaningful
factors that may affect the realization of such expectations are variations in
the level of bookings, which can be affected by general economic conditions and
growth rates for the SMT and APT industries and the intensity of competition,
marketplace acceptance of and response to the Meridian Series as currently
offered or as enhanced in the future (as evidenced by levels of sales, margins,
or both), product development delays or performance problems from the Meridian
Series, failure to comply with the requirements of the Loan and Security
Agreement, as amended, the exact findings or rulings yet to be rendered by an
independent arbitrator, product development delays or performance problems or
difficulties in penetrating the APT market, difficulties or delays in software
functionality and performance, the timing of future software releases, failure
to respond adequately either to changes in technology or to customer
preferences, foreign exchange rate fluctuations, risks of nonpayment of accounts
receivable or changes in forecasted costs, including unexpected required
additional engineering costs.
ITEM 3. Quantitative and Qualitative Disclosure of Market Risk.
Disclosure about market risk is contained under "Market and Other Risks" in Item
2 above.
14
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Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K.
(a) The following Exhibits are furnished pursuant to Item 601 of
Regulation S-K:
10.1 1993 Stock Option Plan, as amended (incorporated by reference to
exhibit 4.1 to post-effective amendment No. 1 to the Company's
registration statement on Form S-8 (Registration No. 333-04755)
filed on June 30, 2000).
10.2 Amendment No. 1, dated July 1, 2000, to the Secured Line of
Credit Agreement dated January 7, 2000 between the Company
and Congress Financial Corporation.
27 Financial Data Schedule for Quarter Ended June 30, 2000.
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the period
covered by this report.
<PAGE>
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
QUAD SYSTEMS CORPORATION
Date: August 8, 2000 By: /s/ Anthony R. Drury
--------------------------------
Anthony R. Drury
Senior Vice President,
Finance and Chief Financial Officer
